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Foreword
Growth of the real estate sector in the recent past in India, indicates the
importance of this sector in Indian economy. Along with fulfilling one of the
basic necessities for human existence, i.e., housing, this sector has also been
used as a key tool by the Indian Government in achieving an overall socio-
economic growth during the last few decades. The development in the real
estate market encompasses growth in both commercial and residential spheres.
As there are large numbers of entities in this segment, there is intense pressure
amongst the entities to stay on top in the investors’ choice list.
The Institute of Chartered Accountants of India (ICAI), while realising the role
of this sector in fuelling growth of Indian economy and recognising need for
guidance on accounting for real estate sales, in 2006, issued Guidance Note
on Recognition of Revenue by Real Estate Developers.
With the fast growth of this sector, the volume and the number of transactions
in this sector have also grown significantly. In the recent past, different practices
followed by the various real estate developers in recognising their revenue has
also been amongst the favourite headlines in the news across the country.
Considering this, ICAI felt that the revision of the Guidance Note is necessary.
I appreciate the initiative taken by the Accounting Standards Board in this regard.
I hope that this revised Guidance Note will be useful both to our members as
well as the others concerned.
Preface
In recent years, with the increase in the demand for real estate, due to factors
such as the fast growing population, introduction of various home loan schemes,
the growth in the real estate sector has increased manifold. This sector has
also emerged as one of the best investing opportunities not only for Indian
investors but also for foreign investors. Huge foreign direct investment in the
last five years in this sector is witness to this fact. As the premier accounting
standards-setting body, the ICAI, due to the distinguished revenue model of
this sector, felt that the accounting guidance earlier given by the ICAI in the
Guidance Note on Recognition of Revenue by Real Estate Developers required
revision, so that the diverse practices followed by different players in the market
can be harmonised into a single uniform practice, particularly, in the application
of Percentage of Completion Method of recognising the revenue. The Guidance
Note primarily provides guidance on application of percentage of completion
method, where it is appropriate to apply this method, i.e., where such
transactions and activities of real estate have the same economic substance
as construction contracts. For this purpose, the Guidance Note draws upon the
principles enunciated in Accounting Standard (AS) 7, Construction Contracts.
In respect of transactions of real estate which are in substance similar to delivery
of goods, principles enunciated in Accounting Standard (AS) 9, Revenue
Recognition, are applied .
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I am confident that this Guidance Note will be extremely useful to the members
of the Institute and others interested in the subject.
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GN(A) 23 (Revised 2012)
Scope
1.2 This Guidance Note covers all forms of transactions in real estate. An
illustrative list of transactions which are covered by this Guidance Note is as
under:
(a) Sale of plots of land (including long term sale type leases) without
any development.
(b) Sale of plots of land (including long term sale type leases) with
development in the form of common facilities like laying of roads,
drainage lines and water pipelines, electrical lines, sewage tanks,
water storage tanks, sports facilities, gymnasium, club house,
landscaping etc.
1.5 This Guidance Note should be applied to all projects in real estate which
are commenced on or after April 1, 2012 and also to projects which have already
commenced but where revenue is being recognised for the first time on or after
April 1, 2012. An enterprise may choose to apply this Guidance Note from an
earlier date provided it applies this Guidance Note to all transactions which
commenced or were entered into on or after such earlier date. This Guidance
Note supersedes the Guidance Note on Recognition of Revenue by Real Estate
Developers, issued by the Institute of Chartered Accountants of India in 2006,
when this Guidance Note is applied as above.
2. Definitions
2.1 Project – Project is the smallest group of units/plots/saleable spaces
which are linked with a common set of amenities in such a manner that unless
the common amenities are made available and functional, these units /plots /
saleable spaces cannot be put to their intended effective use.
A larger venture can be split into smaller projects if the basic conditions as set
out above are fulfilled. For example, a project may comprise a cluster of towers
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(a) Cost of land and cost of development rights -All costs related to
the acquisition of land, development rights in the land or property
including cost of land, cost of development rights, rehabilitation
costs, registration charges, stamp duty, brokerage costs and
incidental expenses.
2.3 Construction costs and development costs that relate directly to a specific
project include:
(e) costs of moving plant, equipment and materials to and from the
project site;
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2.4 The following costs should not be considered part of construction costs
and development costs if they are material:
2.5 Costs that may be attributable to project activity in general and can be
allocated to specific projects include:
(a) insurance;
(b) costs of design and technical assistance that is not directly related
to a specific project; and
Such costs are allocated using methods that are systematic and rational and
are applied consistently to all costs having similar characteristics. The allocation
is based on the normal level of project activity. Construction overheads include
costs such as the preparation and processing of construction personnel payroll.
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Further, where individual contracts are part of a single project, although risks
and rewards may have been transferred on signing of a legally enforceable
individual contract but significant performance in respect of remaining
components of the project is pending, revenue in respect of such an individual
contract should not be recognised until the performance on the remaining
components is considered to be completed on the basis of the aforesaid
principles. This Guidance Note, thus, provides guidance in the application of:
3.4 The application of the methods described in paragraph 3.3 above requires
a careful analysis of the elements of the transaction, agreement, understanding
and conduct of the parties to the transaction to determine the economic
substance of the transaction. The economic substance of the transaction is not
influenced or affected by the structure and/or legal form of the transaction or
agreement.
(a) The seller has transferred to the buyer all significant risks and
rewards of ownership and the seller retains no effective control of
the real estate to a degree usually associated with ownership;
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Compendium of Guidance Notes - Accounting
(b) The seller has effectively handed over possession of the real
estate unit to the buyer forming part of the transaction;
4.3 Where transfer of legal title is a condition precedent to the buyer taking
on the significant risks and rewards of ownership and accepting significant
completion of the seller’s obligation, revenue should not be recognised till such
time legal title is validly transferred to the buyer.
(a) The duration of such projects is beyond 12 months and the project
commencement date and project completion date fall into different
accounting periods.
5.2 This method is applied when the outcome of a real estate project can be
estimated reliably and when all the following conditions are satisfied:
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(b) it is probable that the economic benefits associated with the project
will flow to the enterprise;
(c) the project costs to complete the project and the stage of project
completion at the reporting date can be measured reliably; and
(d) the project costs attributable to the project can be clearly identified
and measured reliably so that actual project costs incurred can be
compared with prior estimates.
When the outcome of a project can be estimated reliably, project revenues and
project costs associated with the project should be recognised as revenue and
expenses respectively applying the percentage of completion method in the
manner detailed in paragraphs 5.3 to 5.8 below.
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Compendium of Guidance Notes - Accounting
5.4 When the outcome of a real estate project can be estimated reliably and
the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue
and project costs associated with the real estate project should be recognised
as revenue and expenses by reference to the stage of completion of the project
activity at the reporting date. For computation of revenue the stage of completion
is arrived at with reference to the entire project costs incurred including land
costs, borrowing costs and construction and development costs as defined in
paragraph 2.2. Whilst the method of determination of stage of completion with
reference to project costs incurred is the preferred method, this Guidance Note
does not prohibit other methods of determination of stage of completion, e.g.,
surveys of work done, technical estimation, etc. However, computation of
revenue with reference to other methods of determination of stage of completion
should not, in any case, exceed the revenue computed with reference to the
‘project costs incurred’ method. Illustration appended to this Guidance Note
clarifies the method of computation of revenue.
5.5 The project costs which are recognised in the statement of profit and
loss by reference to the stage of completion of the project activity are matched
with the revenues recognised resulting in the reporting of revenue, expenses
and profit which can be attributed to the proportion of work completed. Costs
incurred that relate to future activity on the project and payments made to sub-
contractors in advance of work performed under the sub-contract are excluded
and matched with revenues when the activity or work is performed. This method
provides useful information to the extent of contract activity and performance
during a period.
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5.7 When it is probable that total project costs will exceed total eligible project
revenues, the expected loss should be recognised as an expense immediately.
The amount of such a loss is determined irrespective of:
5.9 The changes to estimates referred to in paragraph 5.8 above also include
changes arising out of cancellation of contracts and cases where the property
or part thereof is subsequently earmarked for own use or for rental purposes. In
such cases any revenues attributable to such contracts previously recognised
should be reversed and the costs in relation thereto shall be carried forward
and accounted in accordance with AS 10, Accounting for Fixed Assets.
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9. Disclosure
9.1 An enterprise should disclose:
9.2 An enterprise should also disclose each of the following for projects in
progress at the end of the reporting period:
(a) the aggregate amount of costs incurred and profits recognised (less
recognised losses) to date; and
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At the end of the reporting period the enterprise will not be able to recognise
any revenue as reasonable level of construction, which is 25% of the total
construction cost, has not been achieved, though 10% of the agreement amount
has been realised.
The enterprise would be able to recognise revenues at the end of the accounting
period. The revenue recognition and profits would be as under:
Revenue recognised
(65 % of Rs 200 lakhs as per Agreement of Sale) Rs. 130 Lakhs
Proportionate cost (5000 sft./20,000 sft.) X 390 Rs. 97.50 Lakhs
Income from the project Rs. 32.50 Lakhs
Work in progress to be carried forward Rs. 292.50 Lakhs
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